Unit 3 AOS3 Flashcards
What are exports
= transactions b/n eco agents in Aus + rest of the world in process of purchasing g/s produced in Aus
What are imports
= transactions b/n eco agents in Aus + rest of the world in process of purchasing g/s produced by another nation overseas
How does international trade cause low prices
- p’ers have access 2 cheaper suppliers
- inc competition 4 local producers
- dec domestic market power
- inc wage competition
- economies of large scale production
What is the link b/n low prices and living standards
-> Low prices means that real purchasing power of average income = inc = inc access 2 g/s = inc L.S
Why do countries engage in trade
1) Lower prices
2) Greater choice
3) Economies of scale
4) Access 2 more resources
5) Inc competition + efficiency
What is the link between greater choice and living standards
-> inc access 2 wider range of g/s inc MLS + utility improves -> inc quality of life inc NMLS
What is economies of scale
= volume that a firm needs 2 produce so that it is able 2 effectively cover its fixed costs + operate in a market @ a competitive level
What is the link between economies of scale and living standards
= p’er able 2 offer dec price products t/f inc access -> inc MLS t/f dec financial stress = inc NMLS
Provide a summary of access to more resources from international trade
From international trade, Aus bus’ have access 2…
-> physical capital i.e machinery
-> foreign human capital which removes capacity constraints
-> foreign financial capital in form of debt/equity -> bus expansion
What is the link between access to more resources and living standards
MLS
-> Bus inc access t/f inc willing 2 produce = inc jobs + dec prices = inc income + inc p power
-> gov.t have access 2 g/s 2 inc infrastructure = dec prod costs t/f dec bottlenecks + dec prices + inc access
NMLS
-> inc jobs = dec financial stress + dec crime rates
-> inc quality of life from better public transport that inc air quality
-> improved access 2 health + education = inc mental + physical health + literacy rates
How does trade increase competition and efficiency
- international specialisation = use of resources in most efficient way
-> inc output + export excessive production
-> use income 2 spend on imports t/f inc output + keep costs down - competition inc efficiency b/c -> better + more efficient production / move 2 industry where comp advantage can be maintained
What is the structure of the balance of payments
Balance of payments ->
1) Current account
-> balance on merchandise trade
-> net services
-> net primary income
-> net secondary income
2) Capital and Financial account
-> Capital account
-> Financial account
- net portfolio investment
- net direct investment
- financial derivatives
- net other investment
- net reserve assets
What is credit
= whenever money is received
They’re shown as +ve accounts
What is debit
= whenever money is paid
They’re shown as -ve accounts
What is the balance of payments
= record of financial transactions b/n economic agents of Aus + eco agents overseas
What is the current account
= records all receipts + payments of a current nature. Consider transactions that do x create future obligations
What is the balance of merchandise trade (BoMT)
= value of export credits 4 goods sold overseas less value of import debits 4 goods purchased from abroad
What is Net services
= value of service credits received from overseas less value of service debits paid abroad
What is net primary incomes
= difference b/n values of income credits received from overseas less the value of debits paid abroad
What is net secondary incomes
= difference b/n value of secondary income credits received by our residents less the value of secondary income debits paid abroad
What is a current account deficit
CAD = total payment in CA of balance of payments exceeds total receipts
obviously CAS = opposite
What is the capital account
= capital transactions include net capital transfers + net acquisition of non produced, non financial assets
Capital transfers involve net inflows of funds into Aus by migrants
Net acquisition covers excess of credits over debits 4 sale of copyright, patents, overseas franchises, trademarks
What is the financial account
= show how Aus funds / pays for its CAD
-> record balance of value of total credits 4 investment + borrowing received by Aus from abroad less total debits 4 investment + leading by Australians abroad
What are the factors of the financial account
1) net direct investment
2) net portfolio
3) financial derivatives
4) other investment
5) net reserve assets
What is net direct investment
= purchase, setting up or expansion of companies + assets in Aus by foreigners classified as credits less similar investment overseas by Aus, classified as debits
What is net portfolio investment
= difference in value of transactions by foreign individuals purchasing Aus shares, debts + securities, less value of similar assets purchased by our residents
What is financial derivatives
= complex financial investments that create assets or liabilities
What is other investment
= credits (Bank 2 Bank) less debits (Bank 2 Bank) 4 loans + deposits
What is net reserve assets
= contains both RBA + gov.t transactions involving dealings in reserves of foreign currencies, gold, special drawings rights + required contributions 2 IMF
Money received from overseas = credits, money paid = debits
-> gov.t 2 gov.t
What is the structural component of CA
-> relates 2 AS side of economy
1) Savings / investment imbalance
-> NFL = NFD + NFE
2) Low levels of international competitiveness due 2 dec lvls of efficiency + inc costs of production
What is the cyclical component of CA
-> movements in the CA related 2 changes in economic cycle / lvls of economic activity in Aus economy
What does strong economic activity in the cyclical component of CA cause
- Inc AD = inc gap b/n savings + investment
-> net primary income = inc debits as we borrow more overseas
-> trade imbalance moves further into deficit (inc debits in BoGS)
What does weak economic activity in the cyclical component of CA cause
- Dec AD = dec gap b/n savings + investment
-> net primary income = dec as we borrow less from overseas
-> trade imbalance moves closer to surplus (dec in debits in BoGS)
-> likely due 2 swings in the BoGS which is largely due 2 swings in bus cycle
Non negotiables when talking about the CA
- Must reference inc / dec in value of debits / credits in subaccount
- Subaccount that is likely 2 be impacted
AD factors that impact the current account
1) Increase disposable income
2) Recent inc in interest rates
3) inc in labour costs
4) fall in c’er + bus confidence
5) Depreciation of the AUD
6) Impact of drought
7) Recent slowdown of overseas growth
8) Improvement in labour productivity
How does increased disposable income impact the current account
= cyclical
-> BoMT + Net Services impacted
Debits b/c inc M expenditure
Inc debits
Impact CA by inc debits which dec surplus
How does recent increases in interest rates impact the current account
= Cyclical
-> BoMT + net services impacted
Debits dec -> inc CAS
How does increase in labour costs impact the current account
= Structural
-> BoMT + Net Services impacts international competitiveness
Credits dec + Debits inc
-> dec CAS
How does fall in consumer confidence and business confidence impact the current account
= Cyclical
-> BoMT + Net Services impacted
Debits dec
-> inc CAS
How does drought impact the current account
= Structural
-> BoMT + Net Services impacted
Credits dec (maybe debits too but lower rate)
-> dec CAS
How does the recent slowdown of overseas growth impact the current account
= Cyclical
-> BoMT +Net Services impacted
Credits dec
-> dec CAS
How does improvement in labour productivity impact the current account
= Structural
-> BoMT + Net Services impacted
Credits inc
-> Inc CAS
What is net international investment position
= describes extent 2 which Aus = financially obligated 2 rest of the world
-> NIIP made up of Aus’ net foreign liabilities (NFL) which is composed of Net foreign debt (NFD) and Net foreign equity (NFE)
What is net foreign debt
= calculated by looking @ the net debt obligations that flow from our total borrowing from overseas and subtracting our ‘total lending’ 2 overseas
What is the composition of net foreign debt
- Public / government debt (approx. 20%)
- Private debt (approx. 80%)
What is net foreign equity
= net equity obligation that results from foreign ownership of Aus assets less Aus ownership of foreign assets
What is terms of trade
= ratio of average prices received 4 Aus X relative 2 average prices paid for M
What is terms of trade formula
= Export price index / import price index x 100
What is the export price index
= constructed by measuring changes in the average prices of a basket of Aus X goods with items weighted 2 their relative importance in trade
What is the import price index
= constructed by measuring changes in average price of a basket of Aus M goods with items weighted according 2 relative importance in trade
What are changes in terms of trade referred to as
= unfav / fav
How can changes in global demand for Aus exports impact terms of trade
-> dec demand = dec price = dec TOT
-> inc demand = inc price = inc TOT
How can commodity prices impact terms of trade
(top 3 = iron ore, coal, gas)
inc prices -> inc TOT
dec prices -> dec TOT
How do production costs in trading partners impact terms of trade
-> dec costs -> cheaper M t/f inc pressure on TOT
-> inc costs -> more expensive M t/f dec pressure on TOT
How does a movement in TOT impact CAS
-> inc TOT -> inc CAS b/c value of credits 4 X inc / value of debits 4 M dec (BoMT+ NS)
opposite for dec TOT
How does a movement in TOT impact AD
-> inc TOT -> inc price 4 X -> inc (X-M) -> inc spending on g/s produced in Aus economy over given period of time
opposite for dec TOT
How does a movement in TOT impact national income
inc TOT -> inc price 4 X -> inc national income in form of disposable income + company profits
opposite for dec TOT
How does a movement in TOT impact strong and sustainable growth
inc TOT -> inc real GDP from inc national income reinvested in domestic economy = inc private expenditure (C+I) = inc AD = inc economic activity = inc GDP h/r causes demand inflationary pressures
opposite for dec TOT
How does a movement in TOT impact full employment
inc TOT -> inc DD4L in economies = inc jobs + dec unemployment from inc AD through inc national income
opposite for dec TOT
How does a movement in TOT impact price stability (inflation)
inc TOT -> inc national income -> inc AD from inc C+I -> inc eco activity from producers expanding production t/f expansion in AS closer 2 productive capacity t/f creating demand inflationary pressures
opposite for dec TOT
How does a movement in TOT impact living standards
inc TOT -> inc national income = inc C+I t/f inc eco activity -> inc dd4l = dec unemployment -> inc L.S b/c c’er have inc disposable income t/f access g/s + financial stress dec, +vely impacting physical + mental health
opposite for dec TOT
What is the foreign exchange market
= market 4 trading currencies t/f determines foreign exchange rates 4 every currency
-> includes all aspects of buying + selling + exchanging currencies @ current / determined prices
Factors affecting exchange rates
Relative interest rates
Capital flows
Demand for X + M
The terms of trade inc
The terms of trade dec
Relative rates of inflation
How do relative interest rates affect exchange rates
Aus > ROW -> inc demand 4 AUD 2 invest in Aus (App)
Aus < ROW -> inc supply of AUD 2 invest overseas (Dep)
How do capital flows affect interest rates
Capital inflow = movement of $ into Aus = inc demand 4 AUD -> appreciation of AUD
Capital outflow = movement of $out of Aus = inc supply 4 AUD -> depreciation of AUD
How does demand for exports and imports impact exchange rates
overseas economic growth inc -> inc demand 4 AUD -> appreciation of AUD
growth in national spending -> supply of AUD in F.C market -> depreciation of AUD
How does an increase in the terms of trade impact exchange rates
- inc prices received 4 X relative 2 M
- resulting from inc commodity prices
- inc purchasing of commodities -> inc need 4 AUD = inc demand -> appreciation of AUD
How does a decrease in the terms of trade impact exchange rates
- dec prices received 4 X relative 2 M
- resulting from dec commodity prices
- dec purchasing of commodities -> dec need 4 AUD = dec demand -> depreciation of AUD
How do relative rates of inflation impact exchange rates
Aus inflation rate > ROW -> depreciation b/c dec in X demand -> dec demand 4 AUD + inc import demand -> inc supply of AUD
opposite for Aus inflation rate < ROW
How does the an exchange rate movement impact CAD
-> dec international competitiveness b/c X more expensive in FC terms + M cheaper in AUD terms = dec value in credits + inc value in debits in BoMT + NS -> deterioration in CAD
How does the an exchange rate movement impact strong and sustainable growth
= dec international competitiveness = X more expensive in FC terms + M cheaper in AUD terms = dec (X-M) t/f dec AD = dec volume of production b/c p’er dec output = dec levels of economic activity
H/r dec demand inflationary pressures
How does the an exchange rate movement impact full employment
-> dec international competitiveness = X more expensive in FC terms + M = cheaper in AUD terms = dec (X-M) t/f dec AD -> dec volume of production t/f dec DD4L = inc cyclical unemployment
How does the an exchange rate movement impact low inflation
-> dec international competitiveness = X more expensive in FC terms + M cheaper in AUD terms = dec (X-M) = dec AD = dec volume of production t/f move away from productive capacity -> less demand inflationary pressures
How does the an exchange rate movement impact living standards
-> dec international competitiveness = X more expensive in FC terms + M = cheaper in AUD terms = dec(X-M) = dec AD = dec volume of production as p’ers dec output = dec DD4L = inc cyclical unemployment
-> dec MLS + NMLS
What is international competitiveness
= measures a country’s ability 2 compete in global markets 4 g/s
Factors that influence international competitiveness
1) productivity
2) production costs
3) availability of natural resources
4) exchange rates
5) relative rates of inflation
How does productivity impact international comeptitiveness
= measured by output per unit of input
-> inc productivity = inc international competitiveness b/c Aus p’er able 2 offer g/s @ lower prices
How do production costs impact international competitiveness
-> inc = dec Aus competitiveness b/c p’er less willing / able 2 produce g/s @ low prices
opposite for dec
How does availability of resources impact international competitiveness
-> inc access = inc competitiveness -> theory that country should produce g/s where it is inc efficient @ producing relative 2 another country
How do exchange rates impact international competitiveness
-> depreciating AUD = inc
-> appreciating AUD = dec
How do relative rates of inflation impact international competitiveness
-> low compared 2 ROW = inc international competitiveness b/c g/s inc attractive 2 domestic + international c’er
How does international competitiveness impact strong and sustainable growth
-> inc levels of international competitiveness = X cheaper in foreign currency terms -> inc X, dec M = inc AD -> inc production 2 meet demand -> inc eco activity + growth (real GDP) h/r demand inflationary pressures
How does international competitiveness impact full employment
-> inc levels of international competitiveness = X cheaper in FC terms = inc X, dec M = inc AD -> inc production 2 meet demand = inc eco activity t/f inc DD4L = dec cyclical unemployment
How does international competitiveness impact low inflation
-> inc international competitiveness = X cheaper in FC terms = inc X, dec M = inc AD -> inc production 2 meet demand = inc eco activity + economy closer 2 productive capacity t/f demand inflationary pressures
How does international competitiveness impact living standards
-> links 2 availability of jobs / inc unemployment = dec LS, dec unemployment = inc LS
